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MarketSmith powers the charts in this video.

When the market is bullish, it is looking for the slightest reason to go up. We saw that in October of 2022 and January 2023, when earnings reports and growth were lackluster, and yet, many stocks rallied. We are seeing the opposite now. Company after company from various industries reported much better than expected earnings and raised guidance. And yet, they were all sold off for the most part. I pay attention to the earnings reactions because the market is forward-looking and often sees/discounts things that might not be so obvious right now. Google, Meta, and Microsoft crushed estimates and still traded lower. Poor reaction to good news is what causes bear markets.

I know, you keep hearing that positive seasonality is about to kick in and we will have a year-end rally. We’ve been reading the same thing for the past four weeks and most stocks have been making lower highs and lower lows. One of these days, seasonality experts will be right. I am not mocking. I am just saying that relying solely on seasonality is not a practical way to manage risk if you are actually trading or managing money.

Nothing goes straight down. The indexes are not too far from reaching oversold levels that historically led to powerful short-term bounces. Maybe the FOMC meeting next week will trigger one of those rallies? I don’t know, no one does. The sentiment is still a bit complacent considering where interest rates, oil, gold, and volatility are. Traders will be traders and we will look for opportunities regardless of the tape. Those opportunities are not the same every week. This is why we don’t have to be active every single day or use the same position size in every type of market. It’s ok to sit it out and protect capital and confidence if your approach doesn’t work in a corrective tape. It’s ok to be short if this is working for you, It’s ok to learn new tricks if the old ones are not working right now. Whatever you do, make sure that you enter asymmetric trades where your winners are at least 2x your risk. Otherwise, why are you even trading in this tape?

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MarketSmith powers the charts in this video.

The indexes are still in a pattern of lower highs and lower lows or in other words a downtrend. Until that changes, any talks about positive seasonality are fruitless. The mere fact that stocks are correcting despite bullish seasonality should get your antennas up. There’s something rotten in this market. It tried to rally on October 6th; ran for a few days and just like any other rally since August, it was met with overwhelming supply and sold off again. 

I am not sure if the market is still worrying about inflation but the 10-year yield tagged 5% last week. The jump in rates might be a reflection of a bigger bond supply to fund the ever-expanding deficit and worries about the price of oil if the Middle East conflict escalates. The net effect is the same nevertheless. Interest rates are like gravity for stocks. 

There are no growth, momentum stocks left to hide in. Anything that held relatively well up until recently, was taken out on a stretcher after TSLA missed earnings estimates. What about GOOGL, META, and MSFT some might ask? I don’t consider them high-momentum, high-growth stocks. They are slower movers and more of a cash-cow play. When cash pays 5% and stocks are falling, people have an easy alternative. 

Earnings season has begun. So far, the reactions have been mostly bearish. Regardless of beating or missing estimates, most stocks have been selling off post-earnings. NFLX was a minor exception. The expectations there were too low as the stock was crashing ahead of its report. It gapped near its declining 50dma, where it is trying to hold and build a new base. Tesla missed estimates and it was completely crushed. Next on the deck are Google, Microsoft, Amazon, and Meta. If some of them don’t really surprise to the upside, the indexes are in trouble.

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Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.

MarketSmith powers the charts in this video.

We had a 4-5-day bounce which lifted most stocks in the face of increasing inflation numbers. The consensus opinion was that the major indexes rising on bad news is how markets bottom. Sprinkle a follow-through day and a favorable seasonality and one can understand the excitement. The tech sector led the way until a treasury bond action saw a weak demand on Thursday and rates spiked again. Rates are currently highly negatively correlated with stocks. This hasn’t always been the case but this relation is what moves markets now. It’s hard to have a sustainable rally without rates pulling back. Since August, every small bounce lasted a week or so and it was met by selling that led to lower highs and lower lows. This pattern hasn’t changed yet. Until it does, seasonality is irrelevant. 

Now we have another factor at play. Geopolitical concerns have caused a bid in oil, gold, and military stocks like LMT, NOC, KTOS, AXON, SWBI, etc. Few want to be aggressively long without a hedge when a new war conflict is brewing. This is understandable. This is why markets have been so volatile. What matters is how we approach and read this tape. There are obviously new themes that are appearing and old ones that are waking up. Narratives move markets so we have to be aware of them. 

The current consensus is that if the stock indexes rally for the remainder of the year, large-cap tech stocks will continue to outperform. They’ve done so all year. The so-called magnificent seven have had a great year and are still looking much better than the rest of the market. Here’s the current YTD return of those stocks: NVDA +211%, META +162%, TSLA +104%, GOOGL +56%, AMZN +55%, AAPL +38%, MSFT +37%. This is where money hides when there are very few growth stocks and they are not performing especially well. The mega-caps rising is a defensive market move. They are swimming in cash and cash is finally earning a decent yield.

Energy is still the leading sector. The recent rise in oil & gas prices is certainly helping but I am not sure how sustainable it is. Before things escalated in the Middle East, oil was hit hard with expectations that a recession would reduce demand. Everything changed overnight. It’s hard to predict what happens next. Energy stocks have been super volatile and not easy to trade.

Gold and gold miners have been mocked for a while. They are among the best performers in the past week or so. Can they follow through and they’ll keep making lower highs and lower lows?

Can defense stocks follow through? Most have been under pressure for most of the year but the war drums have awakened them and reminded that the world will keep spending more on defense in the coming years and probably decades. 

Cybersecurity stocks were the first to break out to new highs when QQQ had a follow-through day a week ago. They are shaping up to be among the new leaders when the indexes bounce again – PANW, ZS, CRWD, PLTR, etc. 

We have to adjust to the current market reality. Bounces and drops have been more frequent. Most of the trending moves have been only a few days followed by a violent reaction in the opposite direction. There are decent opportunities for active traders but they are not for the faint of heart and certainly not for those who like to trade aggressively and use a lot of margin. The smart move for most people here is to trade less and smaller until the situation improves. 

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.